When Does Taxation Constrain Growth? Institutional Quality and the Tax Burden– Growth Relationship in Sub-Saharan Africa
This study of 44 Sub-Saharan African countries from 1996 to 2022 finds that while a higher tax burden generally promotes economic growth, its positive impact diminishes as institutional quality strengthens, suggesting that revenue mobilization and governance reforms should be pursued as a complementary, sequenced agenda rather than separate policy goals.
Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer
In the quest to understand why some nations grow rich while others struggle, economists have long focused on two powerful engines: the money governments collect from their citizens and the rules that govern how that money is used. The first engine is taxation. When a government collects taxes, it gains the resources to build roads, schools, and hospitals, which can help an economy grow. However, if taxes are too high or collected poorly, they can also stifle business and discourage people from working. The second engine is the quality of institutions. This refers to the strength of a country's laws, the fairness of its courts, and the honesty of its leaders. Strong institutions ensure that money is spent wisely and that contracts are honored, creating a stable environment where businesses can thrive. For decades, policymakers have debated whether these two engines work best when turned on separately or together, and whether collecting more money is always a good idea or if it depends entirely on how well a country is run.
A new study focusing on Sub-Saharan Africa seeks to answer exactly this question. Researchers gathered data from 44 countries in the region, looking at every year from 1996 to 2022. They wanted to see if the relationship between tax collection and economic growth changes depending on how strong a country's institutions are. The team used a massive dataset that carefully separated actual tax revenue from other types of income, such as money from selling oil or foreign aid, to get a clear picture of the tax burden. They paired this with detailed measures of governance, including how well laws are enforced and how much corruption exists. By analyzing these numbers together, they could observe not just whether taxes or institutions helped growth on their own, but how they influenced each other.
The findings reveal a nuanced story about how development works in this part of the world. The researchers found that both collecting more taxes and having stronger institutions are generally good for economic growth. However, the impact of collecting taxes is not the same everywhere. In countries where institutions are weak—where laws might be unclear or corruption is common—raising taxes actually provides a significant boost to economic growth. In these places, the act of collecting taxes forces the government to build the necessary machinery to do so, such as better record-keeping and more professional staff. This process simultaneously builds the state's capacity to function and provides funds for public services, creating a powerful engine for growth.
As a country's institutions become stronger and more effective, the extra boost from raising taxes begins to fade, though it does not disappear or turn harmful within the range of data observed. In nations with already strong governance, the marginal benefit of collecting a little more tax is smaller. This is because the state has already built much of its capacity, and the focus shifts to how efficiently that money is spent rather than the act of collecting it. The study suggests that the biggest growth dividends from raising taxes are found precisely in the countries that need them most: those with weaker systems. The researchers caution that this does not mean taxes are bad in strong countries, but rather that the urgent need to build state capacity makes tax collection a particularly potent tool for growth in weaker ones.
The study also addresses a common worry: that raising taxes might hurt growth if the government is not trustworthy. The data shows that this fear is not supported by the evidence in this region. Even in countries with the weakest institutions, the link between higher taxes and higher growth remained positive. The researchers did find that the statistical certainty of these results is strongest when looking at the broad patterns over time, rather than trying to predict year-by-year changes. While the most advanced statistical methods used to check for cause-and-effect were less precise due to the nature of the data, the overall pattern remained consistent. The evidence points to a clear conclusion: domestic revenue mobilization and governance reform should be viewed as partners, not rivals.
For policymakers, this suggests a specific path forward. The study argues that efforts to raise more tax revenue should be paired with efforts to improve governance, such as strengthening the rule of law and reducing corruption. Trying to collect more money without improving how the government works risks wasting that revenue. Conversely, trying to improve institutions without the resources to fund them is difficult. The most effective strategy appears to be a sequenced approach where early efforts to collect taxes are used to build the very institutions that will ensure that money is spent wisely. This creates a cycle where better collection leads to better governance, which in turn leads to more growth. The research highlights that for Sub-Saharan Africa, the key to unlocking economic potential lies in understanding that building a state's ability to collect money and building a state's ability to govern well are two sides of the same coin.
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